China's Pensions Sector Opening Up to Foreign Investment

Before the new measures, the government already rolled out tax and other policy incentives to encourage development in the private pensions sector. In April 2018, five regulatory bodies including the China Banking and Insurance Regulatory Commission (CBIRC) and the State Taxation Administration jointly issued the Notice on the Pilot of Deferred Commercial Retirement Insurance for Individual Tax, launching a one-year pilot program providing tax deferral benefits for private pension insurance products in Shanghai, Fujian province and Suzhou Industrial Park. Then in March, Heng An Standard Life, a joint venture (JV) between U.K.-based insurer Standard Life Aberdeen and Tianjin TEDA International, became the first to receive CBIRC approval to establish a pension insurance JV, just the ninth pension insurance company in China.

For international insurance companies like Manulife, the announcement of the new measures was a welcome one. "In the past, when policy measures were announced about opening up, the pension industry was not explicitly mentioned," said Calvin Chiu, Hong Kong-based Head of Asia Retirement at Manulife. "We were happy to see for the first time the specific mentioning of pension management companies for foreign companies to participate in, but we are still waiting for the CBIRC to introduce a clear set of regulations." The Canadian insurer is in talks with the CBIRC to set up a pension fund management JV.

China's national pensions system is structured, in accordance with the World Bank's multi-pillar framework, in three pillars: the state's basic pension fund as the first pillar; the enterprise and occupational annuities voluntarily established by enterprises and public institutions as the second pillar; and private pensions for individuals as the third pillar.

The nation is facing what some have called a "demographic time-bomb": an aging population, a low birth rate and a dwindling workforce, the legacy of four decades of the one-child policy. With the number of insured retirees projected to more than double by 2050, China's public pension fund could see the gap between contributions and outlays reach $1.64 trillion by then according to the Chinese Academy of Social Sciences.

This grim prognosis has led to calls for reforms in China's pension third pillar, which lags far behind both the first and second pillars in asset terms. According to reports published by consultancies KPMG and McKinsey & Co., in 2017, the first pillar—the government scheme—accounted for over 60% of the country's pensions assets.

The third pillar's appeal stems from its potential to be a supplementary source of savings for retirees delivered with higher rates of return than what is currently the case with public funds, thereby easing the state's burden. The Public Pension Fund which holds the largest pool of the country's pension money only managed a 2.5% average annual rate of return from 2012 to 2016 according to KPMG.

An attraction for foreign companies is the prospect of a further roll-out of the tax incentives piloted last year across the country and to other retirement products such as the novel pension target securities funds resembling American target retirement funds introduced by 14 Chinese asset managers in August 2018. Foreign investors enjoy ample opportunity in China's pensions market especially when the other pension pillars are also being opened up, Shanghai-based partner at King & Wood Mallesons Stanley Zhou said. The government has been granting licenses to external managers to access both public pension and annuity funds which foreign-invested pension fund management companies will also be allowed to apply for.

For Manulife, the appeal of China's pensions market is broad and not limited to the third pillar. "We want to participate in multiple pillars," Chiu said. He added that part of the reason why they want to set up a new pension fund management JV is to make it easier to secure a license in the second pillar space. "We are interested in all aspects of the end-to-end retirement and pensions market in China. That is why we are looking for influential and strong Chinese partners in order to make the most impact."

In 2017, Manulife signed a Memorandum of Understanding with the Agricultural Bank of China to explore opportunities in China's retirement market. "We hope to find a Chinese partner who has a broad distribution network and leverage its branches," Chiu said. Manulife also plans to leverage its two existing life insurance and asset management JVs in China to develop retirement products for its new pension fund management JV to market if approved.

Currently, there is only one pension fund management company in the country—CCB Pension Management, a JV between China Construction Bank and the National Council for Social Security Fund established in 2015. Allowing foreign companies to establish and invest in pension fund management companies will mark the opening up of a virtually non-existent portion of the retirement market to foreign investment. "[The measure] will result in greater foreign participation in China's pension fund management market, which can lead to greater competition, more innovation and better quality of service," Zhou said.

Richard Zeng, a Beijing-based partner at Zhong Lun Law Firm, said his firm has already been approached by several foreign insurance and fund management companies inquiring about opportunities in China's life insurance and private pensions markets. A Reuters report in April listed Generali, AIA Group and Prudential Plc. as other international insurers keen on tapping China's pensions market.

However, the new measures have yet to be translated into official rules and regulations. Hannah Ha, a Hong Kong-based partner at Mayer Brown, highlighted the fact that several existing rules and regulations will need to be amended to implement these measures. These include Article 8 of PRC Regulations for the Administration of Foreign-funded Insurance Companies (中华人民共和国外资保险公司管理条例) requiring foreign insurers have a 30-year track record, and Article 9 of Tentative Provisions for the Administration of Insurance Asset Management Companies (保险资产管理公司管理暂行规定) capping foreign ownership of insurance asset management companies. She also pointed to the $5 billion asset requirement for foreign insurers which will remain as a significant barrier for small insurers.

"The 11 Measures are fairly new and directional without too much meat in it," she said. "Although foreign investors in general welcome them, most of them are still waiting for the detailed implementation rules to be issued before they have any concrete ideas as to how they should react or respond."

The government has yet to release follow-up drafts or guidelines on the back of these new measures, but the CBIRC has indicated that it will continue establishing pension fund management companies on a case-by-case basis including those set up by foreign investors. For Manulife, this likely means some more waiting yet before China's pensions market is fully open to it and other international companies.

"Looking at the 10-year horizon, it will likely be a transition period going from a situation where domestic players dominate [the pensions market] to a more balanced landscape with more foreign players providing insights gained from operating in other markets." Chiu said.

"But it will take much longer than ten years for the market to be truly market-driven. There is still a lot of reform that needs to take place."